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July 1 Cattle on Feed Report is a Bear

The cattle on feed report showed a 4 percent increase in the number of cattle on feed on July 1 over last year. It also reported a 16 percent increase in placements and a 4 percent increase in marketings in June of 2017 as compared to June of 2016. This is much larger than expected and cattle futures prices have opened significantly lower today in response to this report and the cattle inventory report.

There are a few reasons this report put downward pressure on the futures prices. For starters, the 16.1 percent increase in placements is about 10 percent higher than most analysts expected. Analyst expectations are not perfect, obviously. However, when expectations miss the mark by this much, the report suggests information that the markets had not absorbed before. In this case, the July 1 cattle on feed report, when combined with the large placements in the past few reports, suggests there may be larger supplies of 2017 feeder cattle available in the U.S. than previously expected. Cattle markets are driven by expectations of what will happen in the future. If buyers expect prices to be lower in a few months when they will be sellers, that puts downward pressure on prices today.

The drought in the Northern Plains must be considered as a potential reason for the larger placements. The argument is that producers in that region had to sell calves they would not have otherwise sold and that many of these calves ended up as placements into feedlots. This is absolutely a factor. However, it is not the only factor nor is it the largest. If we dig into the data a bit, we see that placements into South Dakota feedlots were 67 percent larger than last year. But in terms of head, a 67 percent increase is only about 16,000 head. Meanwhile, placements into Texas feedlots increased by 70,000 head over June of last year. There were similar increases in other major feeding states, too. The larger placements are an industry-wide event and not just a reaction to a specific region. I do expect that we will also see another significant boost in placements in South Dakota in July as the drought continues.

The fact that many of the placements were light-weight cattle that won’t hit the fed market anytime soon is encouraging. This suggests that some of the increase is due to cattle being pulled forward. Therefore these cattle reduce the number of feeder cattle available for placements in future months. Further, there are actually fewer market-ready cattle (on feed longer than 90 days) right now than there were last year. However, this won’t last for long due to the increased placements over the past few months. Larger fed supplies will pressure fed prices lower. Demand will need to continue to outperform in order to provide price support.